Ercüment Erdem Att. Alper Uzun

Special Enforcement Proceedings in Turkish Legislation: Enforcement By Foreclosure Of Collateral And Bankruptcy

May 2014

Introduction

According to Turkish enforcement legislation, the legal remedies for execution proceedings and the rights granted to the creditor, depend on the legal power of the documents possessed on which the proceeding is based. There are different types of proceedings for each legal circumstance. In each type of procedure, the period for payment and objection and also the consequences of objection are different.

According to Article 45 of the Enforcement and Bankruptcy Law (“EBL”), if a creditor has a security over the assets of the debtor (e.g. mortgage, movable pledge, share pledge, bank account pledge), the creditor has to initiate special execution proceedings against the debtor first, which is called “enforcement by foreclosure of collateral”. If the security is not enough to cover the credit, then the creditor may initiate other execution proceedings, which will be determined according to the power of the documents that the creditor possesses.

Enforcement by Foreclosure of Collateral

In this case, there will be two types for execution proceedings which will differ in kind of the legal documents and objection opportunities granted to the debtor.

If the official document, known as an agreement table, which is prepared by the land registry office and shows the degree of mortgages, contains an unconditional acknowledgment of debt, then the creditor may initiate the more secure execution proceeding and the debtor will receive an “execution order”. In this proceeding, the debtor will be sent notice that the asset will be sold unless the debtor can pay the debt in 30 days or can submit a decision for adjournment of execution.

If the agreement table does not contain an unconditional acknowledgment of debt, the creditor may initiate the standard execution proceeding against the debtor and the debtor will receive a “payment order”, which states that the asset will be sold unless the debtor can pay the debt in 30 days or objects to the notice of payment due within 7 days. As it is seen, this proceeding allows the debtor to object to the payment notice before the execution office. If the debtor objects to the execution proceeding, the creditor must initiate a lawsuit to continue the proceedings.

Bankruptcy Proceedings

For unsecured debts, the creditor may initiate an ordinary execution proceeding or a bankruptcy proceeding against the debtor.

In some cases, the ordinary execution proceeding may be ineffective and may end without obtaining a satisfactory result for the creditor. Therefore, Turkish legislation allows the creditor to initiate a bankruptcy proceeding against the debtor.

Where the creditor initiates a bankruptcy proceeding, the creditor starts this proceeding by making a demand to the execution office located in the area where the debtor’s principal place of business is registered at the trade registry. After initiation, the debtor will receive a payment order, which gives notice that the creditor may file a bankruptcy lawsuit unless the debt is paid within 7 days or an objection is submitted before the execution office. If the debtor submits an objection, then the creditor may initiate a lawsuit for cancellation of the objection. At the end of the judgment, the court may accept the case and decide to declare the debtor bankrupt. As is known, declaration of bankruptcy means that all of the debtor’s assets will be organized to pay all their debts.

According to Article 177 EBL, the creditor may also file a lawsuit for bankruptcy directly against the debtor where the debtor suspends the payments, runs away, makes fraudulent transactions or hides assets from creditors.

However, the debtor may also initiate a lawsuit for the postponement of bankruptcy. The representatives of the company or any of its creditors may request postponement of bankruptcy, i.e. where bankruptcy is deferred until a more in-depth review of the actual financial situation is conducted. Postponement of bankruptcy will only be considered when the company submits to the court a proposal to restructure its financing, primarily to the benefit of its creditors. Should the court consider the restructuring plan viable, it may grant the company bankruptcy postponement for a period of one year. The postponement period may be extended, subject to the determination of the courts but shall not exceed four years. The court that rendered the decision to postpone bankruptcy may take all necessary measures to protect the assets of the company and may appoint a trustee upon making its decision. If the court does not accept the restructuring plan or is convinced that the debtor company cannot continue its activities, then the court will dismiss the request for postponement and decide to open the debtor’s bankruptcy proceeding because in such a lawsuit the claimant claims that the debtor ran into debt and the debtor will go bankrupt if it is not postponed.

Some restrictions are imposed on creditors enforcing their rights over companies under postponement of bankruptcy. For example, during the postponement period, no proceedings may be filed against the company and any proceedings previously initiated are suspended. Prescription periods and statutes of limitations deadlines shall be suspended until the end of the postponement of bankruptcy. It is important to note that foreclosure proceedings, mortgage claims and commercial pledges may be initiated or continued during such postponement period. Although such proceedings may be in effect, it is important to highlight the fact that during the postponement period, creditors may not take repossession measures, and the sale of pledged property may not be carried out.

Conclusion

According to Turkish enforcement legislation, there are different types of proceedings for each legal circumstance. The legal remedies for execution proceedings and the rights granted to the creditor depend on the legal power of the documents possessed on which the proceeding is based on. If a creditor has a legal security over the assets of the debtor, then the creditor has to initiate special execution proceedings against the debtor first, a process called “enforcement by foreclosure of collateral”. For unsecured debts, the creditor may initiate a bankruptcy proceeding against the debtor, where the ordinary execution proceeding seems ineffective.