Exploration of Pre-Pack Insolvency Procedures in Türkiye

On 7 December 2022, the European Commission published a draft directive aimed at harmonizing certain aspects of insolvency law. The intention behind this directive is to mandate the inclusion of "pre-pack proceedings" in national insolvency laws across the European Union ("EU"). Although Türkiye is not a member of the EU and does not have specific rules for governing pre-pack insolvency sales, it does have procedures that are similar, if not an identical, to pre-pack proceedings.

In this article we will take a closer look at Türkiye's pre-pack-like institution.

Understanding Pre-Pack Like Proceedings in Türkiye

A pre-pack is the sale of part or all of a distressed company's business and assets to a new owner, which takes place immediately after the company enters formal insolvency proceedings. However, there are no formal rules governing pre-pack insolvency sales. Instead, restructuring proceedings in Türkiye are facilitated by other methods, some of which closely mirror pre-pack arrangements. These methods, although not officially called as "pre-packs", serve as a basis for possible future arrangements:

I Composition (Concordat):

The concordat is a restructuring method available to any debtor that is unable or unlikely to meet its debt obligations in a timely manner. It offers distressed debtors the opportunity to either pay their debts in a payment plan or to avert potential insolvency by extending payment deadlines or even waiving them, all under the Enforcement and Bankruptcy Law ("EBL"). The EBL also covers the possibility of post-insolvency concordats and concordats achieved through the abandonment of assets.

For concordats, no specific conditions are imposed; the main requirement is that procedural criteria are met. Debtors in financial distress can apply for concordats, with many insolvent companies opting for composition to avoid imminent bankruptcy. The application is submitted to a commercial court together with a comprehensive restructuring proposal. This proposal must address the following key elements:

1. How it will be applied to all creditors affected by the project and how it will ensure equality between similar creditors;
2. The potential impact of the project on contracts to which the debtor is a party;
3. Effects of the project on the debtor’s to dispose of its assets;
4. Whether the debtor will have recourse to financial resources, such as loans, if deemed necessary;
5. Methods to ensure the feasibility of the project such as transfer of the business, mergers, changes in the articles of association, transfer of management of the business, continuation for debts, change in interest rates, issuance of securities;
6. Who will audit the implementation of the project after confirmation; and
7. Acknowledgment that the dissenting creditor will be treated equally with similar creditors, unless that creditor has expressly accepted less than what is provided for her class.

In order for a court to confirm a concordat, the debtor must ensure, inter alia, that:

1. The creditors are likely to receive a higher amount than the amount to be obtained from the debtor’s bankruptcy (liquidation);
2. The proposed amount is proportionate to the debtor’s assets;
3. The project is approved by the required number of creditors; and
4. Security is provided for the priority creditors and for credits duly created during period of suspension.

II Settlement

The EBL also provides for settlement procedures when a corporation or cooperative that is unable to pay its monetary debts, does not have sufficient assets and receivables to cover its debts, or is in danger of falling into one of these situations may seek to restructure through conciliation. This procedure involves the pre-negotiation and majority approval of the restructuring project by the creditors concerned.

The term "creditors affected by the project" includes creditors whose claims, rights, or interests are restructured under the project.

Conclusion

While Türkiye is expected to reform of its bankruptcy and insolvency laws in the near future, the inclusion of specific provisions on pre-pack procedures is not expected. Nevertheless, the significant increase in the number of concordat applications in the post-pandemic period indicates that the Turkish economy is well prepared for pre-pack procedures. It is plausible that Türkiye may introduce pre-pack procedures into its legal framework through future amendments, driven by its strong trade cooperation with the EU and ongoing harmonization efforts as part of the accession process.