What Is Concordat? Process and Application Requirements

Is your business struggling to pay its debts? Don’t worry, bankruptcy isn’t the only way out. Through a concordat, you can restructure your debts and restore your financial balance while continuing your operations. In this Papel Blog article, we explain step by step what a concordat is, who can apply, how the process works, and how it differs from bankruptcy postponement.

What is the concordat?

A concordat is a legal mechanism that allows individuals or legal entities who are struggling to pay their debts or are at risk of financial distress to restructure their obligations under the supervision of a court, together with their creditors. In this process, the debtor undertakes to repay their debts according to a specific plan, while creditors generally agree to waive part of the debt or extend the payment terms.

In short, the concordat offers the debtor the opportunity to recover without going bankrupt and gives creditors the opportunity to protect their receivables. It serves as a form of reconciliation that not only provides businesses with a second chance but also supports economic stability.

Regulated under Articles 285 and following of the Execution and Bankruptcy Law, the concordat aims to prevent the destructive consequences of bankruptcy. During the period granted by the court, the debtor is protected from enforcement proceedings and has the opportunity to restore financial stability. Creditors, on the other hand, can collect part of their receivables within a structured plan rather than losing them entirely in the event of bankruptcy.

Differences between bankruptcy postponement and concordat

Bankruptcy postponement and a concordat are two different legal methods offered to debtors to recover from financial difficulties. However, they differ significantly in scope, conditions, and outcomes.

Differences in scope

Bankruptcy postponement applied only to capital companies and cooperatives, while a concordat is a broader mechanism that both individuals and legal entities can apply for.

Differences in application conditions

For bankruptcy postponement, the company had to be insolvent. In contrast, for a concordat, it is sufficient that the debtor cannot pay debts or faces the risk of payment difficulty.

Differences in process

In bankruptcy postponement, the court could appoint a trustee to manage the company, while in the concordat, the debtor continues operations, and the process is supervised by a concordat commissioner.

Differences in the role of creditors

In bankruptcy postponement, creditor approval was not mandatory, whereas in the concordat process, creditor voting and approval are required for the process to proceed.

Differences in legal status

With the amendments made in 2018, the bankruptcy postponement mechanism was abolished. Today, the main legal method of debt restructuring is the concordat.

Who can apply for a concordat?

The individuals and entities eligible to apply for a concordat can be summarized as follows:

• Debtor-related conditions: Any debtor, whether an individual or a legal entity, who cannot pay debts when due, is experiencing payment difficulties, or faces the risk of non-payment, may apply for a concordat.

• Conditions for legal entities: Companies and cooperatives, as legal entities, may also apply for a concordat through a resolution of their authorized bodies.

• Creditor-related conditions: In cases where the debtor is subject to bankruptcy, a creditor with the right to request bankruptcy may file a reasoned petition to apply for a concordat. However, if the debtor is not subject to bankruptcy, the creditor cannot exercise this right.

How to apply for a concordat?

A concordat application must be filed by the debtor or an authorized creditor with the Commercial Court of First Instance having jurisdiction. In Turkey, the competent court is generally the one located in the district where the debtor’s registered office or place of residence is located. The application must be submitted with a properly prepared petition, and the court fees must be deposited at the court cashier at the time of filing.

Application requirements

The debtor must be unable to pay debts that have fallen due, be in financial difficulty, or face the risk of non-payment. During the application, the court evaluates whether the debtor acts “in good faith,” fulfills obligations toward creditors, and whether the proposed restructuring plan is feasible.

Required documents

The following documents must be attached to the application petition:

• Concordat preliminary project: The debtor must clearly state how they plan to improve their financial situation, how and when debts will be paid, and whether asset sales or capital increases will be used if necessary.

• Financial statements and asset documents: The latest balance sheet, income statement, cash flow statement, asset-liability balance, interim financial statements if available, receivables-payables list, and details of movable/immovable assets.

• List of creditors and amounts owed: Includes the names of creditors, the amount owed to each, and whether any creditors are privileged.

• Comparative table: Shows the difference between what creditors would receive under the concordat versus if the debtor went bankrupt.

• Audit or “reasonable assurance” report: Prepared by an independent audit firm, evaluating the likelihood of implementing the proposed plan. Although small and medium-sized enterprises (SMEs) may be exempt, it is essential for large corporations.

• Other documents: Any additional credit agreements, appraisal reports, or notarized commercial books that may be requested by the court or the appointed commissioner.

How does the concordat process work?

The concordat process allows a debtor to correct their financial situation without going bankrupt through a court-supervised procedure. The process proceeds in two main stages: the temporary moratorium and the definitive moratorium.

Application stage

The debtor or an eligible creditor submits a concordat application to the Commercial Court of First Instance, along with the required documents. The application includes the debtor’s financial situation, debt list, and the concordat plan. After reviewing the documents, the court may grant the first stage, the temporary moratorium.

Temporary moratorium

The temporary moratorium provides the debtor with the first protection period. It is generally granted for three months and may be extended for an additional two months if necessary. During this period:

• All enforcement and foreclosure proceedings against the debtor are suspended, and new ones cannot be initiated.

• The court appoints a concordat commissioner to supervise the debtor’s activities.

• The commissioner reports on the debtor’s financial situation and the feasibility of the proposed plan.

During this phase, the debtor continues operations while preparing to implement the restructuring plan.

Definitive moratorium

At the end of the temporary moratorium, the court reviews the commissioner’s reports and creditor opinions. If it determines that the debtor’s plan is feasible, it grants a one-year definitive moratorium, which may be extended for up to six additional months if necessary. During this period:

• The debtor continues operations under the supervision of the commissioner.

• Creditors are informed about the payment plan and participate in voting.

• If the plan is accepted by a majority of creditors and approved by the court, the concordat process is completed.

Ratification and implementation

With the court’s ratification, the concordat becomes legally binding. The debtor starts making payments according to the approved schedule, and creditors are obliged to comply with the plan.

 

Sources: 1.

 

This blog post contains general information, not legal, financial, or investment advice. The content is prepared for informational purposes only, and you are advised to seek professional advice for your specific circumstances. The expressions in this article do not carry any binding nature or responsibility and reflect only the author’s evaluation. All your decisions are your responsibility, and Papel Electronic Money and Payment Services Inc. accepts no liability for any consequences arising from them.