What is Concordat? A Comprehensive Guide to the Debt Restructuring Process

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What is Concordat?

Concordat is a legal process that allows debtors facing financial difficulties to restructure their debts by reaching an agreement with their creditors. This court-approved process aims to provide debtors with an opportunity to recover financially while also protecting the rights of creditors. Debtors who declare concordat are granted protection from debt enforcement for a certain period, allowing them to implement their repayment plans.

Types of Concordat

For companies and individuals struggling to pay their debts, concordat serves as an essential legal mechanism for financial restructuring. The types of concordat applied in Turkey vary depending on the debtor's financial status and agreements made with creditors.

Ordinary Concordat

Ordinary concordat is a type of concordat where a debtor, facing financial distress, reaches an agreement with creditors under a specific repayment plan to restructure their debts. The debtor initiates the concordat process by applying to the court, and once the proposed plan is approved by the court, it comes into effect. During this process, the debtor's repayment obligations are rearranged, and debts are paid off within the agreed-upon timeframes.

Concordat within Bankruptcy

Concordat within bankruptcy allows a debtor to restructure their debts by negotiating with creditors before entering into bankruptcy proceedings. The aim is to enable the debtor to continue their operations and prevent bankruptcy. If the payment plan submitted to the court is accepted, the debtor is given a certain period to restructure and pay their debts.

Concordat outside Bankruptcy

Concordat outside bankruptcy provides a solution for debtors struggling to pay their debts but who have not yet declared bankruptcy. In this process, the debtor reaches an agreement with creditors to restructure their debts and enters a legal protection period to avoid bankruptcy. This court-supervised process grants the debtor additional time and financial relief.

Concordat by Surrender of Assets

In this type of concordat, the debtor transfers all their assets to creditors to repay their debts. The proceeds from selling these assets are used to pay off debts. In this process, the debtor may lose all their assets but gains an opportunity for a fresh financial start by relieving themselves of their debt burden.

Concordat aims to maintain economic sustainability by providing a balanced solution for both debtors and creditors. The type of concordat chosen depends on the debtor’s financial situation and the demands of creditors.

Which Debts Are Covered by Concordat?

Concordat is a legal arrangement that primarily applies to debts arising from commercial activities. It allows businesses in financial distress to negotiate with creditors and repay their debts according to a structured plan.

Covered debt types include:

Bank loans: Loans obtained by businesses from banks fall within the scope of concordat.

Checks and promissory notes: Checks and promissory notes issued during commercial transactions are included in this process.

Supplier debts: Commercial debts arising from the purchase of goods and services can be included in the concordat.

However, concordat does not cover personal debts. For example, individual credit card debts, personal loans, or private debts are not eligible for this process.

Conditions for Applying for Concordat

To request concordat, certain legal conditions must be met. The basic requirements for application are as follows:

Experiencing Financial Hardship

The debtor must be facing financial difficulties and provide official documents to prove this. Documents submitted to the court should include financial statements, balance sheets, and a breakdown of existing debts.

Acting in Good Faith

To be eligible for the concordat process, the debtor must act honestly and in good faith. They must demonstrate that they have made efforts to pay their debts but are unable to do so due to current financial conditions.

Presenting a Payment Plan

During the concordat application, a detailed repayment plan outlining how and when debts will be paid must be submitted. This plan should be created based on the debtor’s income and expenditure situation.

Preparing a Concordat Project

The debtor must prepare a concordat project specifying under what conditions and according to what schedule payments will be made to creditors. This project should outline how debts will be fully or partially paid.

Financial Documents Required

The debtor must submit the following financial documents to the court:

• Balance sheet

• Income statement

• List of creditors

• Debt amounts

• Assets

• Cash flow statement

These documents allow the court to conduct a detailed review of the debtor’s financial status and determine whether the concordat can be successfully completed.

Requesting a Temporary Moratorium

When applying for concordat, the debtor typically requests a temporary moratorium of three months from the court. During this period, the debtor’s assets cannot be seized, and the court evaluates the concordat application.

Appointment of a Concordat Commissioner

If the application is accepted, the court appoints a concordat commissioner to ensure a fair and transparent process. The commissioner oversees the debtor's financial situation, manages negotiations with creditors, and submits the proposed payment plan to the court.

Approval by the Creditors’ Committee

The concordat plan must be presented to the creditors’ committee and approved by at least two-thirds of the creditors. If the required majority is not achieved, the concordat application may be rejected.

Court Approval

Once approved by creditors, the concordat plan is submitted to the court for final approval. With the court’s approval, the concordat process officially begins.

How to Apply for Concordat?

The debtor applies to the Commercial Court of First Instance with documents detailing their financial situation. The court evaluates the debtor’s financial condition and either approves or rejects the concordat request. All decisions regarding the concordat process are made by the Commercial Court of First Instance.

Following court approval, the concordat is officially announced. This announcement, aimed at informing creditors about the debtor’s financial status, is typically published in the Trade Registry Gazette and local newspapers.

Key Considerations in the Concordat Process

The successful execution of the concordat process depends on both the debtor company's ability to improve its financial situation and its effective communication with creditors.

Accurate and Transparent Information

The debtor company should provide creditors with transparent information regarding its financial status, debts, and the concordat process. Providing incomplete or incorrect information may jeopardize the legal process and lead to a loss of trust from creditors.

Timely and Proper Application

It is crucial to apply for concordat before the company's financial difficulties become irreversible. An early application can contribute to a positive evaluation of the process by the court and creditors.

Conducting an Effective Negotiation Process

A constructive approach should be adopted in negotiations with creditors, taking their concerns into account and offering appropriate solutions.

Preparing for the Court Process Diligently

Documents to be submitted to the court must be complete and in compliance with legal regulations. Financial statements, debt lists, and repayment plans should be prepared in detail.

Effective Communication with the Concordat Commissioner

Close cooperation should be maintained with the court-appointed concordat commissioner, and regular updates should be provided regarding the supervision of the process.

Long-Term Planning and Financial Control

The continuity of the debt repayment plan must be ensured, and income-expense balance should be constantly monitored. Precautions should be taken in advance for unexpected financial fluctuations.

Rights of Creditors After a Concordat is Declared

After the declaration of a concordat, creditors have the following rights:

Right to Negotiate: The right to express opinions on the concordat project.

Right to Approve or Reject: The authority to accept or reject the project.

Right to Debt Collection: The right to collect receivables according to the approved plan.

Right to Legal Proceedings: Under certain conditions, the right to initiate legal action against the debtor.

Right to Communicate with the Commissioner: Direct communication with the concordat commissioner.

Right to Monitor the Debtor Company: The ability to observe the debtor’s financial situation.

Right to Seek Legal Remedies: The right to appeal to the court.

Right to Request Debt Ranking: The ability to request an arrangement of debt priorities.

Companies Declaring Concordat and Sectoral Distribution

In recent times, companies declaring concordat are mostly concentrated in the following sectors:

Construction Sector: This sector sees the highest number of concordat declarations due to rising costs and economic fluctuations.

Textile and Fashion Industry: Intense competition, fluctuating market conditions, and changes in consumer habits place this sector in second place.

Fuel Sector: Companies facing financial difficulties due to market fluctuations and high costs often resort to this option.

Food Industry: Supply chain issues and increasing costs have led to concordat declarations in this sector as well.

Tourism and Hospitality: Due to the pandemic and economic uncertainties, this sector frequently experiences concordat declarations.

Companies operating in these sectors should carefully plan their legal and financial strategies regarding the concordat process.

Conclusion

The concordat process is a critical financial restructuring tool for individuals and businesses struggling with debt repayment. When implemented correctly, it allows debtors to stabilize their financial situation and continue operations while safeguarding the rights of creditors. However, for a successful outcome, debtors must act transparently and in good faith, present a viable repayment plan, and be thoroughly prepared for legal proceedings.

For businesses facing financial distress, early application is one of the most crucial factors in increasing the likelihood of a favorable concordat outcome.