What is Concordat? Last Exit Before Bankruptcy for Companies in Financial Distress
Due to economic fluctuations, sudden changes in market conditions or managerial errors, even the healthiest of companies may occasionally fall into financial distress and become unable to pay their debts. In this case, the Turkish legal system provides an important mechanism to protect bona fide debtors who have difficulty in paying their debts but have the potential to continue their activities from the devastating consequences of bankruptcy: “Concordat”. Concordat, which is regulated under the Enforcement and Bankruptcy Law (EBL), is the restructuring of the debtor’s debts and the continuation of its commercial activities by reaching an agreement with its creditors under court supervision. Concordat, as the last exit before bankruptcy, is an institution based on the win-win principle, which aims to both protect the economic existence of the debtor company and to ensure that creditors collect their receivables at a higher rate than bankruptcy. In this article, we will examine in detail how the concordat process works, its stages and what it means for companies in financial distress.
Purpose and Types of Concordat: The main purpose of concordat is to ensure that any debtor who is unable or in danger of being unable to pay its debts when due can pay its debts with a certain discount (discount) or by spreading its debts over time and thus avoid bankruptcy.
- Ordinary Concordat: It is the most common type. It is realised when the debtor offers its creditors to pay a certain percentage of its debts (discount concordat) or to pay all of its debts by spreading them over certain terms (maturity concordat) or both (mixed concordat).
- Concordat by Abandonment of Assets: It is the debtor’s proposal to transfer the authority to dispose of its assets to the creditors or a third party and to collect the receivables of the creditors from the income to be obtained by the liquidation of these assets.
Concordat Process Step by Step:
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Application and Required Documents: The persons who can apply for concordat are any debtor (company or natural person) who cannot or is in danger of being unable to pay its debts, or any creditor who may request bankruptcy. When applying to the commercial court of first instance, the debtor must submit a detailed “concordat preliminary project” showing the seriousness of its financial situation and the feasibility of its project, and financial statements prepared by an independent audit firm.
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Provisional Finalisation Decision and its Consequences (Art. 287 of the EBL): If the court, after examining the application and the attached documents, is of the opinion that the debtor’s situation is suitable for concordat, it shall immediately issue a three-month “provisional respite” decision. This period may be extended for a maximum of two months if deemed necessary. The most important consequences of the provisional respite decision are as follows:
- Suspension of Proceedings: No enforcement proceedings, including public receivables (tax, SSI), can be initiated against the debtor, and the proceedings that have already begun will cease.
- Precautionary Measure and Seizure cannot be applied: Precautionary injunction and precautionary attachment decisions cannot be applied against the assets of the debtor.
- Concordat Commissioner is appointed: The court appoints one or more temporary concordat commissioners to supervise the activities of the debtor and to investigate the applicability of the project.
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Final Finalisation Decision and Consequences (Art. 289 of the EBL): Within the provisional deadline, if the court, having received the report to be submitted by the commissioner and the opinions of the creditors, concludes that it is possible for the concordat to succeed, it grants the debtor a one-year “definitive deadline”. This period may be extended for another six months upon the request of the commissioner in mandatory cases. The definitive respite continues the results of the provisional respite and gives the debtor time to negotiate its project with the creditors. During this period, the debtor shall continue its commercial activities under the supervision of the commissar.
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Meeting of Creditors and Voting on the Project (Art. 302 BEC): Within the definite grace period, the concordat commissioner ensures that the creditors notify their claims and organises a “meeting of creditors”. At this meeting, the concordat project submitted by the debtor is put to the vote of the creditors. Two types of majority are required for the project to be accepted:
- A majority exceeding half of the registered creditors and receivables.
- Or a majority exceeding one quarter of the registered creditors and two thirds of the receivables.
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Approval of Concordat by the Court (Art. 305 of the EBL): The concordat project accepted by the creditors is submitted to the approval of the court. The court examines the following issues during the ratification proceedings:
- Whether the amount proposed in the project is more than the possible amount that may be received by the creditors in case of the debtor’s bankruptcy.
- Whether the project is proportionate to the debtor’s financial resources.
- Whether the majorities required for the acceptance of the project are complied with.
- Whether the necessary guarantees have been provided. If the court concludes that these conditions are fulfilled, it shall approve the concordat . With the ratification decision, the concordat becomes binding for all creditors, including creditors who did not vote or voted against it.
Failure of the Concordat: If the creditors do not accept the project or the court does not approve the project, the court rejects the concordat request and decides directly on the bankruptcy if the debtor is one of the persons subject to bankruptcy.
Concordat is the last bright exit before the dark tunnel of bankruptcy for companies that have fallen into a financially difficult situation but have the potential to be saved. While this process allows the company to restructure its debts and continue its activities, it also offers creditors the opportunity to collect their receivables at a higher rate and more regularly than in bankruptcy. However, concordat is a process that requires expertise and involves complex legal and financial procedures. It is vital for the success of the project and the restoration of the company’s financial health that a company that is considering applying for concordat, acts together with an experienced lawyer and financial advisor in the field of concordat law from the very beginning of the process.