The Exchange Rate Date Applicable to the Conversion of Foreign Currency Claims into Turkish Lira in Concordat Proceedings

The Decisions of the Court of First Instance, the Regional Court of Appeal, and the Reversal Decisions of the Court of Cassation

In the case at hand, following the proceedings initiated upon the debtor company’s application for concordat, the Court of First Instance confirmed the company’s concordat plan. In its decision, the Court of First Instance held that foreign currency claims should be converted into Turkish lira as of the date on which the concordat respite was granted and rendered its judgment accordingly. This decision was appealed by one of the company’s creditors. As can be understood from the Decision, the appeal particularly challenged the date adopted for the conversion of foreign currency claims into Turkish lira.

The legal issue underlying the Decision examined in this article concerns precisely this question: in concordat proceedings, as of which date should foreign currency claims be converted into Turkish lira, and which exchange rate should be applied?

The Regional Court of Appeal held that, for the purpose of converting foreign currency claims into Turkish lira, the relevant date should be the date on which the temporary concordat respite was granted. According to the court, the date of the temporary respite constitutes a common reference point for all claims, particularly for the calculation of the statutory creditor majorities. On this basis, the Regional Court of Appeal found the decision of the Court of First Instance to be in compliance with both procedural and substantive law.

Upon further appeal, the decision of the Regional Court of Appeal was reversed by the relevant Civil Chamber of the Court of Cassation (the “Civil Chamber”). The Civil Chamber noted that the EBL contains no explicit provision specifying the exchange rate date to be used for the conversion of foreign currency claims into Turkish lira. Nevertheless, it emphasized that such conversion is necessary to ensure equality among creditors, to present the debtor’s assets and liabilities in a realistic manner, and to determine the amount of each creditor’s claim within the concordat proceedings. According to the Civil Chamber, the conversion of foreign currency claims into Turkish lira is of particular importance for the objective assessment of whether the conditions for the confirmation of the concordat have been satisfied.

The Civil Chamber further noted that both doctrine and practice have put forward differing views as to the date that should be taken as the basis for the conversion of foreign currency claims into Turkish lira. In this respect, various dates have been suggested, including the date of the temporary concordat respite, the date of the definitive concordat respite, the date on which the concordat is confirmed, and the date on which the period for the submission of claims expires. After considering these alternatives, the Civil Chamber concluded that the most appropriate approach would be to adopt the last day of the fifteen-day period prescribed under Article 299 of the EBL for creditors to file their claims.

The Civil Chamber emphasized that, particularly under economic conditions characterized by high inflation and significant fluctuations in foreign exchange rates, this approach provides the most suitable solution for preserving the balance of interests between foreign currency creditors and other creditors. Accordingly, it held that foreign currency claims should be converted into Turkish lira based on the foreign exchange selling rate announced by the Central Bank of the Republic of Türkiye (“CBRT”) on the last day of the aforementioned fifteen-day period.

The Civil Chamber further stated that adopting the last day of the claims submission period as the relevant date offers the most suitable solution for determining the scope of creditors’ voting rights, establishing the post-set-off claim or debt positions of creditors asserting set-off, calculating the amount of security to be provided in respect of privileged claims and debts arising from transactions carried out with the commissioner’s authorization, and enabling the preparation of a comprehensive and well-reasoned report on whether the conditions for the confirmation of the concordat have been satisfied. Accordingly, the Civil Chamber concluded that this date constitutes the most appropriate and objective reference point in light of both the balance of interest among the parties and the practical requirements of concordat proceedings. On these grounds, the Civil Chamber reversed the decision of the Regional Court of Appeal.

The Resistance Decision

According to the Court of First Instance, the established case law of the Court of Cassation supports the conversion of foreign currency claims into Turkish lira as of the date on which the temporary concordat respite is granted. The court further noted that, under the EBL, a temporary respite produces the legal effects of a definitive respite and that unsecured claims cease to accrue interest as of that date. The court observed that, under inflationary economic conditions, interest constitutes the principal mechanism through which claims denominated in Turkish lira are protected against depreciation in value. However, once a temporary respite is granted, unsecured creditors are no longer entitled to accrue interest in their claims. By contrast, converting foreign currency claims into Turkish lira based on an exchange rate prevailing on a later date would allow foreign currency creditors to continue benefiting from increases in exchange rates. According to the court, this would create an inequality to the detriment of creditors holding Turkish lira-denominated claims and would be inconsistent with the objective of concordat proceedings, which is to ensure equality among creditors. For these reasons, the Court of First Instance adhered to its previous ruling and maintained its position that foreign currency claims should be converted into Turkish lira as of the date on which the temporary concordat respite is granted.[2]

The Assessment of the General Assembly of Civil Chambers of the Court of Cassation

Following the appeal against the resistance decision, the dispute came before the General Assembly of Civil Chambers of the Court of Cassation. The General Assembly of Civil Chambers of the Court of Cassation first dismissed the appeal filed against the resistance decision by the creditor who had not sought appellate review of the Court of First Instance’s original decision. In contrast, it examined the appeal of the creditor who had timely challenged the Court of First Instance’s decision before both the Regional Court of Appeal and the Court of Cassation and proceeded to assess the dispute on its merits.

The General Assembly of Civil Chambers of the Court of Cassation emphasized that the provisions of the EBL governing concordat proceedings contain no explicit rule specifying the exchange rate date to be used for the conversion of foreign currency claims into Turkish lira. Nevertheless, the Decision explains that the conversion of foreign currency claims into Turkish lira during concordat proceedings is essential for ensuring equality among creditors, accurately presenting the debtor’s financial position, and determining the extent to which each creditor may expect to recover its claim under the concordat.

The Decision further emphasizes that, to determine whether the creditor majorities required for the approval of a concordat have been attained, all claims must necessarily be calculated in a common currency. Otherwise, valuing foreign currency claims based on different exchange rates as of different dates could result in variations in the number of claims and, consequently, in the voting rights attached to those claims. For this reason, foreign currency claims must be converted into Turkish lira as of a common date applicable to all creditors.

According to the General Assembly of Civil Chambers of the Court of Cassation, this common date is the last day of the fifteen-day period prescribed under Article 299 of the EBL for the submission of claims. Indeed, this date not only serves to maintain the balance of interests between foreign currency creditors and other creditors, but also constitutes the most suitable and objective reference point for calculating creditors’ voting rights, assessing set-off claims, determining the amount of security to be provided in respect of privileged claims and debts arising from transactions carried out with the commissioner’s authorization, and ensuring that the reasoned report to be prepared by the commissioner is capable of effective review and verification.

Within this framework, the Decision holds that foreign currency claims should initially be recorded in their original currency and that, upon the expiry of the claims submission period, all foreign currency claims should be converted into Turkish lira based on the foreign exchange selling rate announced by the CBRT on that date. Consequently, the General Assembly of Civil Chambers of the Court of Cassation concluded that the resistance decision, which had adopted the exchange rate prevailing on the date of the temporary concordat respite as the basis for the conversion of the foreign currency claim into Turkish lira, was erroneous and therefore reversed the resistance decision.

During the deliberations before the General Assembly of Civil Chambers of the Court of Cassation, it was argued that both before and after the enactment of Law No. 7101, the established case law of the Court of Cassation had consistently taken the date of the temporary concordat respite as the relevant date for the conversion of foreign currency claims into Turkish lira. It was further contended that adopting a later date could operate to the detriment of creditors holding Turkish lira-denominated claims and undermine the principle of equality among creditors. However, this view was not endorsed by the majority of the General Assembly of Civil Chambers of the Court of Cassation. Accordingly, the General Assembly of Civil Chambers of the Court of Cassation adopted the approach of the Civil Chamber of the Court of Cassation, thereby departing from the latter’s previously established line of case law on this issue.

Assessment and Conclusion

The Decision examined in this article is noteworthy in that it clarifies an important issue in concordat law that has long been debated in doctrine and has given rise to divergent approaches in practice.[3] Indeed, the EBL contains no explicit provision specifying the exchange rate date to be used for the conversion of foreign currency claims into Turkish lira. This legislative silence has given rise to significant uncertainty, particularly during periods characterized by high inflation and substantial fluctuations in foreign exchange rates, as to how the balance of interests among creditors should be maintained.

The General Assembly of Civil Chambers of the Court of Cassation endorsed the approach adopted by the Civil Chamber of the Court of Cassation and concluded that foreign currency claims must be converted into Turkish lira based on the CBRT foreign exchange selling rate prevailing on the last day of the claims submission period prescribed under Article 299 of the EBL. In doing so, the General Assembly of Civil Chambers of the Court of Cassation rejected the reasoning of the resistance decision, which had held that foreign currency claims should be converted into Turkish lira based on the exchange rate prevailing on the date of the temporary concordat respite.

The approach adopted in the Decision designates the last day of the fifteen-day claims submission period as the common reference date for all creditors in determining the exchange rate applicable to the conversion of foreign currency claims into Turkish lira. This approach is significant because it introduces a greater degree of predictability into practice with respect to the determination of the relevant exchange rate date for the conversion of foreign currency claims in concordat proceedings.