Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the R&I volume discussing various topics including legislative reforms, notable insolvency filings and asset purchase within key jurisdictions worldwide.
1 In the last year, have you seen any developments or trends in the nature and volume of insolvency filings?
Gökben Erdem Dirican: It has been a year a with various ups and downs in the Turkish market. Despite the measures taken by the government for the improvement of the economy, it would be fair to conclude that the number of applications for bankruptcy and concordat are still considerable. The increase in the unemployment rate is also another fact indicating the distressed situations in Turkey. It would not be correct to indicate a specific industry segment experiencing a rise in distressed situations. However, we would highlight that almost all sectors are facing with significant distressed situations.
In considering that many Turkish banks have separate work-out teams to deal with distressed borrowers, we may also note that the economic crises of 2018 still have negative effects on the cash flow of the companies.
2 Describe the one or two most notable insolvency filings in your jurisdiction in the past year.
GED: The increasing changes in Turkish lira and the vulnerability of the same resulted in many bankruptcies and concordat applications. Missing payments in many cases force the companies to consider concordat. We believe the number of concordat and bankruptcy proceedings as well as restructurings increased in 2019, however there is no formal data available.
Although the bankruptcy filing of Thomas Cook is not a legal action taken in Turkey, this bankruptcy had a significant effect on various hotels and tour operators in the jurisdiction.
Ali Gözütok: The two most notable insolvency filings in Turkey were the recent concordat applications of Telpa Telekomünikasyon AS, one of the largest mobile phone exporters, and Yeni Elektrik AŞ, which is a reputable legal entity with 850-megawatt power plant generating electricity since 2013. We believe these are very reputable companies and that eventually concordat will assist them in strengthening their financial sources with a better structure, allowing them to continue providing qualified services.
3 Have there been any recent legislative reforms? Is there a perceived need for reform?
AG: The Banking Association of Turkey stated that a new restructuring programme would be launched for small-scale and large-scale companies. Before said programme, only the debtors with more 100 million lira of financial debt were able to make use of the framework agreement allowing them to request restructuring. With the new restructuring programme and framework agreement, debtors whose aggregate principal financial debt is less than 25 million lira can now also apply to financial restructuring. Large-scale companies whose debts are more than 25 million lira shall also be eligible to apply the large-scale framework agreement. The new regulation targets relief for companies that intend to pay debts but are unable to do so due to the damages on their income–expense balance. Companies whose bankruptcy has already been declared will not be able to apply to the programme.
GED: The purpose of a framework agreement is to enable debtors to regain their ability to repay their debts within a reasonable time. Any financial restructuring conducted without this objective will not fall within the scope of the regulation and the framework agreements.
4 In the international insolvency field, has there been any legislative or case law developments in terms of coordination of cross-border cases? What jurisdictions are you most likely to have contact with?
GED: I believe the dual impact of globalisation and technological innovation, and the increase in the number of disputed matters during past years as a result of the global economic downturn, require legislation in the international insolvency field. In a typical insolvency of an international entity, different sets of creditors assert claims on different assets by complying with different rules in many jurisdictions.
Since creditors’ goals are united in seeking to obtain as much value as possible from an insolvent entity, the globalised marketplace requires a global insolvency proceeding. However, in the absence of effective treaty or convention arrangements resolving all these issues, and by considering that many jurisdictions have exclusive authority on insolvency and concordat requests filed for subsidiaries of international companies established in such jurisdictions, the territoriality principle and the state sovereignty principle prevent significantly the coordination of cross-border cases in insolvency.
AG: We advise clients on almost every aspect of law you would expect a commercial law firm might handle. We assisted to clients from various countries and the majority of our clients are foreign companies or their subsidiaries in Turkey. Our firm also collaborates with international law firms on Turkish law matters including insolvency, restructuring and concordat. We also cooperate with technical forensic vendors and international law firms for in-debt due diligence exercises, restructuring and insolvency matters. We are in contact mostly with European jurisdictions and the United States.
5 In your country, is there a particular court or jurisdiction that sees a higher concentration of insolvency filings? What is the attraction of that forum?
GED: Judicial powers are vested in and exercised by the courts where the registered addresses of the subject entities are in relation to insolvency and concordat filings. Turkish Civil Procedural Law continues to look to the traditional notion that the authorised court should be the one presiding where a debtor company is registered. Therefore, the Commercial Courts of First Instance in major cities such as Istanbul and Ankara have long been leading venues for insolvency and concordat requests since the number of member companies registered to Istanbul Chamber of Commerce and Ankara Chamber of Commerce are the highest.
6 Is it fair to describe your jurisdiction as either ‘debtor-friendly’ or ‘creditor-friendly’ in terms of how insolvency filings proceed?
GED: All parties need to be able to anticipate their legal rights and the length of the process in the event of a debtor’s inability to pay. The relevant provisions of Turkish law allow both creditors and equity investors to calculate the economic implications of default by the debtor, and so estimate their risks, while providing several protections and options also to the debtor. There are several restructuring tools available for debtors. Concordat allows companies to reorganise as going concerns instead of liquidating and the existing management is generally allowed to continue running the businesses together with a trustee, instead of being automatically replaced by a trustee or other third party. The execution and bankruptcy offices must equilibrate the interests of both parties as per various provisions of the Turkish Execution and Bankruptcy Law. Debt recoveries for secured creditors are strong, particularly due to creditors’ ability and authority to foreclose on collateral, even during insolvency proceedings. Unsecured creditors do have a voice and active participation in a debtor’s insolvency proceedings and the creditors’ arrangement proposed as part of insolvency shall be subject to the approval of unsecured creditors under certain conditions. Under certain conditions, creditors have a stronger role in the proceedings. For example, they select and replace the administrators or liquidation officers in much the same way as shareholders elect directors. Therefore, it would be correct to state that Turkish law provides various provisions tending to balance the interests of the creditor and the debtor.
AG: The precedents of the Court of Appeal seem to be making the insolvency proceedings more reliable both for the creditor and the debtors, despite the struggle between them. Creditor rights are a fundamental concern of insolvency filings, which shall be secured with a solid legal ground, and there are many sample precedents of the Court of Appeal ruling for protective measures to maximise the value of asset recoveries, which is actually also to the benefit of the debtor whose assets shall be protected against all unfair collection efforts and creditor harassment. Turkish Law also provides a flexible and transparent system for disposing of assets. Therefore, I believe the detailed provisions in law and the precedents of the Court of Appeal ensure a neutral legal environment for the creditor and the debtor that results in a liquidation that will satisfy the creditors on reasonable grounds.
7 What opportunities exist for businesses wanting to purchase assets out of an insolvency, and how efficient is the process? What are the best ways to take advantage of opportunities in this area?
AG: Under Turkish Law, a pre-packaged sale is possible in terms of the Execution and Bankruptcy Law and the liquidator can perform sale of the assets of the company by way of negotiation unless decided otherwise by the general assembly in voluntary liquidation. If the subject of the sale constitutes a wholesale of a significant amount, then a general assembly resolution is required.
As a part of the liquidation proceedings, public auctions shall be arranged by the liquidation officers for the sale of the assets within the bankruptcy estate. A certain threshold must be reached at the public auction for the sale of an asset, which is 50 per cent of the estimated value. If the threshold determined for the first public auction is not reached, the public auction will be adjourned and a second public auction will take place with the same threshold. As an alternative to the public auction method, the creditors may also decide for the liquidation officers to sell a portion of the bankruptcy estates through negotiations with buyers.
GED: There are several outstanding options and many investors such as portfolio management companies, investment funds and high net-worth investors are watching closely for potential distressed investments such as land investments, commercial property investments, private school and hospital investments. There are a significant number of Turkish entities looking out for investors and such options should be diligently reviewed by potential investors through searches and by completing the investments after a legal and financial due diligence, which should cover public debt exposures, client portfolio, contractual obligations and long-term commitments.
The insolvency may be an unfortunate situation for most parties involved. However, it is one of the best ways to acquire a business at a relatively low cost. Therefore, instead of considering the purchase of certain assets, one may consider that insolvent businesses can offer opportunities for investors. I think that starting a new business is always a trouble-free task to complete and it may be a challenging and a time-consuming duty to find and buy an insolvent business.
It is expected that insolvency proceedings and restructuring will steadily increase in the future and potential investors may simply follow these auctions and find out the on sale insolvent businesses by conducting searches with their consultants and, if possible, by strictly following the announcements made for the same.
THE INSIDE TRACK
What two things should a client consider when choosing counsel for a complex insolvency filing in this jurisdiction?
GED: The key issue shall be the experience, which brings efficient and effective services. The legal reliability and planning can be most benefited by the client by obtaining the legal assistance of experienced legal counsels who has extensive practice on complex insolvency filings and can handle critical legal pleadings. Additionally, as a law firm, we also believe it is important to pick a counsel who understands the business and ready to support client’s goals proactively.
What are the most important factors for a client to consider and address to successfully implement a complex insolvency filing in your jurisdiction?
GED: It is particularly useful to avoid claw back actions. In order not to give rise to issues concerning hardening periods, the creditors should also be careful in obtaining securities. For concordat requests, which may be proposed by a debtor or a creditor, the submission of a probable success through a concordat plan, with no intention to cause any damage or loss to the creditors, would be the key element.
AG: Risk management, by maximising the value of a firm’s assets and recoveries by creditors, would also be a key element and informal work out systems should also be considered for a complex insolvency filing.
What was the most noteworthy filing that you have worked on recently?
GED: While we file significant number of bankruptcy lawsuits last year, we also filed cancellation lawsuits for assets transferred within hardening periods. We are currently providing legal assistance to an international entity based in the US, providing equipment and support solutions to agricultural and turf customers through its national and local dealers. The core of the legal assistance is collecting its receivables from a company for which we filed a bankruptcy request.
AG: We expect an increasing demand for our legal assistance due to the economic environment. In the past year, we also negotiated restructuring agreements on behalf of a bank for entities planning to file concordat requests.
