Bankruptcy is a multi-layered legal process directed at the disposal of the debtor’s assets within the procedural framework drawn up by law. With the opening of the process the debtor’s freedom over its assets comes to an end, the enforcement files directed against it are stayed, and the assets belonging to the debtor are brought together in a common pool known as the bankruptcy estate.
From this point the management passes to the responsibility of the bankruptcy administration appointed for the purpose. Identifying the assets, converting them into cash, having creditors file their claims with the estate, preparing the schedule of ranking and distributing the sums obtained according to the statutory ranking all fall within that body’s remit. All these operations are gathered under the heading of liquidation and are subject to strict rules of procedure and mechanisms of supervision.
Below we address, within the framework of the Enforcement and Bankruptcy Act No. 2004, what the opening of bankruptcy means, which assets and rights make up the estate, the powers and responsibilities of the bankruptcy administration, and the order in which the liquidation proceeds. The details of the routes of application and the judicial stage preceding the process are examined separately under the heading of the definition of bankruptcy in Turkish law, the routes of application and the judicial process.
What Does the Opening of Bankruptcy Mean?
The opening of bankruptcy means that the debtor’s assets are taken out of the regime of individual enforcement and placed under a regime of collective liquidation. That state of affairs does not arise automatically when the debtor falls into payment difficulty; it produces its legal consequences only through a bankruptcy judgment given by the Commercial Court of First Instance with jurisdiction. With the judgment the debtor’s freedom of disposal over its assets is removed and the attachable assets and rights are gathered within the estate with regard to the common benefit of the creditors.
The matter is closely connected with public policy and fundamentally alters the nature of the legal relationships between the debtor and the creditors. For this reason the consequences attached to the opening of bankruptcy are governed by detailed and mandatory provisions in the Enforcement and Bankruptcy Act No. 2004.
The Moment of Opening and the Consequences Attached to It
Bankruptcy is regarded as having been opened from the moment the court’s judgment takes legal effect. When the judgment is given the debtor acquires the status of bankrupt and enters a special status for the purposes of bankruptcy law. The picture that emerges as at the moment of opening is as follows:
- All attachable assets, rights and claims belonging to the debtor are included in the estate,
- The debtor’s power of disposal over its assets wholly comes to an end,
- The debtor’s ability to enter into legal transactions in respect of the elements of the assets forming part of the estate is removed,
- Creditors are obliged to assert their rights within the regime of collective liquidation rather than through individual enforcement instruments.
These consequences are required by the principle of equality among creditors (par condicio creditorum), one of the cornerstones of bankruptcy law, and are intended to prevent the assets from being liquidated in a scattered and disorderly fashion.
Publication of the judgment and notification measures
Whether the bankruptcy judgment can take effect as regards creditors and third parties depends on the completion of the publication and notification measures. The judgment is published in the Trade Registry Gazette; where necessary, other means of publication are also used.
The court additionally transmits the judgment to the bankruptcy office without delay. Following that notification, the office carries out the administrative steps required for the bankruptcy administration to be constituted and the liquidation to be commenced.
The essential function of publication is to ensure that creditors are made aware of the bankruptcy and to set in motion the process of filing with the estate. In this respect publication is constitutive as regards the sound and lawful progress of the liquidation.
Stayed Proceedings and Attachments That Become Ineffective
With the opening of the bankruptcy the individual enforcement files being pursued against the debtor are stayed automatically by operation of law. The three consequences arising in this framework may be listed as follows: no new proceedings may be commenced against the debtor, pending proceedings are stayed, and attachments previously levied on the debtor’s assets become ineffective.
The purpose of the provision is to prevent creditors from racing one another and the assets from being divided up in a manner contrary to the principle of equality. After the opening of the bankruptcy the only ground on which creditors may pursue their rights is within the estate and on the basis of the schedule of ranking.
That said, the rights of secured creditors continue to be protected within the framework of the special provisions of the Enforcement and Bankruptcy Act No. 2004.
The Concept of the Bankruptcy Estate
The bankruptcy estate denotes the legal structure in which, upon the opening of the bankruptcy, all attachable elements of the debtor’s assets are gathered as a single whole in the common interest of the creditors. The estate is a special body of assets considered separately from the debtor’s personal assets and dedicated solely to the purpose of liquidation.
With the opening of the bankruptcy the debtor loses the power of disposal over its assets; the assets, rights and claims pass into the estate and become subject to the collective liquidation regime. Equality among the creditors is thereby secured and the piecemeal liquidation of the assets is prevented.
The Legal Nature of the Estate
The bankruptcy estate is a structure of its own kind (sui generis) in Turkish law; it is regarded neither as the debtor’s personal assets nor as the individual property of the creditors. The estate is characterised as a provisional legal community securing the creditors’ common claim.
Under the Enforcement and Bankruptcy Act No. 2004 the content of the estate is made up of two groups of assets: the assets and rights in the debtor’s hands at the moment the bankruptcy is opened, and the assets and rights acquired by the debtor while the liquidation is under way. In this respect the estate is not a fixed but a dynamic structure. The power of disposal over the assets entering the estate lies not with the debtor but with the bankruptcy administration. The administration is obliged to exercise that power with regard to the interests of the creditors and within the statutory limits.
Assets and Rights Included in the Estate
All of the debtor’s assets, rights and claims that are capable of being attached fall within the scope of the estate. In this framework the following in particular are included in the estate:
- Movable and immovable property,
- Deposits and claims held in bank accounts,
- Elements forming part of the commercial enterprise,
- Claims against third parties,
- Intellectual and industrial property rights,
- Rights arising from continuing contracts.
Assets obtained by the debtor after the opening of the bankruptcy that are capable of being attached also, as a rule, enter the estate. This rule is intended to protect the interests of the creditors and to prevent the debtor from causing loss to the estate by acquiring assets after the bankruptcy.
Assets Left Outside the Estate
Not every asset and right of the debtor enters the estate; assets that cannot by law be attached are kept outside it. The following may be listed in this respect:
- Rights strictly attached to the person,
- Items serving to meet the essential living needs of the debtor and their family,
- Those portions of salaries and income whose attachment is prohibited by law,
- Payments in the nature of social assistance and similar payments.
In addition, assets and rights clearly proved to belong to third parties also remain outside the estate. In such a case the third parties concerned may make a claim of title and seek the removal of the element in question from the estate.
This distinction is of decisive importance both for safeguarding the debtor’s minimum living conditions and for ensuring that the property rights of third parties are not impaired.
The Bankruptcy Administration and Its Remit
The bankruptcy administration is an executive body charged, after the opening of the bankruptcy, with the management of the estate and the conduct of the liquidation. Standing in the debtor’s place, it exercises the power of disposal over the assets forming part of the estate and is obliged to have regard to the common interest of the creditors.
Whether the liquidation proceeds effectively, in an orderly manner and in accordance with the law depends largely on the activity of this body. For this reason how the administration is to be formed, which powers it is to exercise and the framework of its relationship with the creditors are governed in detail in the Enforcement and Bankruptcy Act No. 2004.
The Formation of the Administration
The bankruptcy administration is constituted after the opening of the bankruptcy by the bankruptcy office and with the participation of the creditors. As a rule it is structured as a board consisting of three members. The members may be determined either from among the creditors or from among persons with experience in legal, financial and commercial matters. In practice this task is most often undertaken by lawyers, certified public accountants and persons specialised in the relevant field.
The basic aim of this structure is that the estate be managed impartially, efficiently and in a manner protecting the interests of the creditors. The members of the administration are therefore under duties of honesty, care and loyalty in the performance of their functions.
Powers and Responsibilities
The bankruptcy administration is charged with conducting all the operations of the estate and is accordingly endowed with wide powers. Its principal duties are as follows:
- The identification and preservation of the assets forming part of the estate,
- The preparation of an inventory of the assets, rights and claims belonging to the debtor,
- The conduct of the operations relating to the conversion of the assets into cash,
- The management of the process by which creditors file with the estate,
- The drawing up of the schedule of ranking,
- The distribution of the sums collected to the creditors in accordance with the statutory ranking,
- Where necessary, the conduct of actions and enforcement proceedings on behalf of the estate.
The administration must exercise these powers within the limits drawn by the law and with regard to the common interest of the creditors. Where the estate suffers loss through negligent or unlawful acts, the legal liability of the members may arise.
Relations with the Creditors
In carrying out its function the bankruptcy administration is in continuous and necessary contact with the creditors, since the estate is essentially a structure serving the common interest of the creditors. In this framework the administration is obliged to receive and assess requests for the filing of claims, to inform creditors about the process and the liquidation measures, and to convene meetings of creditors.
The creditors, for their part, are afforded the opportunity to supervise the acts of the administration, to object where necessary and to take part in the decision-making processes within the procedures laid down by law. This reciprocal relationship is directed at ensuring that the liquidation is conducted transparently, accountably and fairly.
How Does the Liquidation Process Proceed?
The liquidation is a multi-stage process covering the realisation of the assets under the collective liquidation regime following the opening of the bankruptcy, the determination of the claims and the distribution of the proceeds obtained according to the principles of statutory ranking. The process is as a rule conducted by the bankruptcy administration; in the early stages, however, the bankruptcy office plays an active role and the common will of the creditors is decisive.
The First Steps Following the Opening
With the opening of the bankruptcy the liquidation is regarded as having begun in law. Since the bankruptcy administration has not yet been constituted at this stage, however, the urgent, protective and preparatory measures relating to the outset are carried out of its own motion by the bankruptcy office as required by law.
The measures carried out by the office in this respect are as follows:
- To notify the judgment to the relevant authorities and to publish it in accordance with the proper procedure,
- To place under protection the assets belonging to the bankrupt,
- Where necessary, to apply measures directed at sealing, safekeeping and the protection of possession,
- To call upon creditors by way of publication to file their claims with the estate,
- To issue the invitation to the first meeting of creditors and to determine the day, time and place of the meeting.
Ordinary Liquidation
Where the bankruptcy office decides in favour of ordinary liquidation, it is published within ten days of that decision that an ordinary liquidation is to be carried out. The stages of ordinary liquidation are as follows:
- The holding of the first meeting of creditors,
- The election of the bankruptcy administration,
- The collection of the estate’s claims and, in urgent cases, recourse to sale,
- The determination of claims of title and the examination of the bankruptcy claims,
- The drawing up of the schedule of ranking,
- The holding of the second meeting of creditors,
- The sale of the estate’s assets and the distribution of the proceeds.
The call to the first meeting of creditors is issued by the bankruptcy office, since the administration has not yet been constituted, and is announced by way of publication before the meeting. Although the law lays down no fixed period for the date of the meeting, the meeting must be held within a reasonable interval after the publication of the bankruptcy judgment. That requirement is an extension of the right to be heard, so that creditors may be made aware of the meeting and may actually attend.
The meeting is as a rule held at the place where the bankruptcy office is situated, most often in a hall of the bankruptcy or enforcement office considered suitable for the purpose.
This stage is the protective and preparatory phase of the liquidation; it is intended to prevent the debtor’s assets from disappearing, from being disposed of or from being made the subject of transactions producing consequences to the detriment of the creditors before the administration is constituted.
The First Meeting of Creditors and the Election of the Administration
The first meeting of creditors, held after the opening of the bankruptcy, is one of the most critical stages, at which the institutional structure of the liquidation is established and its subsequent course is determined. Through this meeting the process ceases to rest solely on administrative measures conducted by the bankruptcy office and becomes a legal liquidation regime founded on the common will of the creditors.
At the meeting the bankruptcy administration is elected by the creditors, or an administration appointed on a provisional basis is confirmed; certain urgent decisions listed in Art. 244 may also be taken.
The decisions taken there are binding on the bankruptcy administration and form the legal framework and the guiding will for the measures to be carried out at all subsequent stages of the liquidation. In this respect the first meeting of creditors is regarded as the constitutive and direction-setting phase of the liquidation.
Taking Over the Estate and the Inventory Work
With the election or confirmation of the administration at the first meeting, the conduct of the liquidation passes both in fact and in law to the bankruptcy administration. From that moment the administration takes over the estate and becomes obliged to manage the debtor’s assets in the common interest of the creditors and within the statutory limits.
After taking over, the administration’s first task is the inventory work directed at definitively establishing the scope and content of the estate. The following steps are taken in this respect:
- An inventory is drawn up of all the assets, rights and claims forming part of the estate,
- The debtor’s commercial books and records are examined and the assets and liabilities of the estate are established,
- Where considered necessary, recourse is had to an examination by a court-appointed expert in order to clarify the legal and factual position of the assets.
The inventory stage is the indispensable foundation of the liquidation. The correct and complete determination of the scope of the estate is decisive for the realisation of the assets, for the preparation of the schedule of ranking and, ultimately, for determining the payments to be made to the creditors.
Claims of Title and Actions of Title in Bankruptcy
Where third parties assert that property belongs to them, it is for the bankruptcy administration to decide whether the property that is the subject of the claim of title is to be handed over to them (Art. 228). If the administration rejects the claim, the third party is allowed seven days in which to bring an action of title before the Enforcement Court. If no action is brought within that period, the third party is regarded as having abandoned the claim as against the estate. The Enforcement Court examines the claim within the framework of the general provisions.
If the property that is the subject of the claim of title is in the hands of the third party, that property is not taken from them but is merely recorded in the register (Art. 212). In that case the burden of bringing an action lies with the bankruptcy administration and the action is heard before the ordinary courts.
The Collection of the Estate’s Claims and Urgent Sale
The bankruptcy administration collects the estate’s claims that have fallen due if they are not paid; where necessary it brings actions and commences enforcement proceedings. The assets forming part of the estate are as a rule sold after the second meeting of creditors.
That said, where deferring the sale of certain assets until that moment would produce a result detrimental to the estate, those assets are put up for sale beforehand. In such a case the administration may, if it considers it necessary, also sell by private treaty.
As regards the sale of pledged assets, the provision of Art. 185 applies.
The Gathering and Management of Claims
Another important dimension of the liquidation is the identification, collection and effective management of the claims belonging to the bankrupt. In order to enlarge the assets of the estate and to maximise the fund on which the satisfaction of the creditors will be based, the bankruptcy administration is obliged to pursue and collect the debtor’s claims against third parties.
Under Art. 194, in line with the decisions taken at the second meeting of creditors, the administration carries out the following:
- Actions and enforcement proceedings concerning claims belonging to the bankrupt are conducted on behalf of the estate and in the capacity of representative of the estate,
- A legal and financial assessment is made in respect of claims that are not collectable or whose collection is not economically meaningful,
- Where it is to the benefit of the estate, steps are taken towards settlement, waiver, continuation of the proceedings or their termination, in accordance with the decision taken at the second meeting of creditors.
The administration’s choices at this stage directly affect the total sum to be reached at the end of the liquidation and hence the scope and proportion of the payments to be made to the creditors.
The Filing of Claims with the Estate and the Schedule of Ranking
Whether creditors’ rights can be protected in the liquidation depends on the claims being filed with the estate in accordance with the proper procedure and being assessed according to the statutory ranking. In this respect the filing with the estate and the preparation of the schedule of ranking are the stages forming the legal backbone of the process.
The Process of Filing with the Estate
Following the opening of the bankruptcy, creditors are obliged to file their claims with the estate. Known in practice as “filing with the estate”, this step is a mandatory precondition of a creditor’s ability to take part in the liquidation.
As regards filing, creditors are allowed a period of one month after the publication made under Article 219, and are expected to have their claims filed with the estate within that period. Accordingly, a claim is filed;
- After the publication of the judgment,
- Within the period determined by the bankruptcy office or the bankruptcy administration,
- Together with documents establishing the legal basis and the amount of the claim
in that manner.
A creditor who does not have their claim filed with the estate is as a rule unable to receive a share in the liquidation. In this respect the act of filing is a constitutive step enabling the creditor to take an effective part in the process.
The bankruptcy administration examines the claims filed and assesses their existence, nature and amount; depending on the position it admits the claim, rejects it, or enters it in the estate conditionally.
The Preparation of the Schedule of Ranking
Once the filing process has been completed, the schedule of ranking is drawn up by the bankruptcy administration. The schedule is an official document, binding in the liquidation, in which the claims filed with the estate are classified on the basis of their legal nature, their security position and their statutory ranks of privilege.
Since it determines the order in which and the proportion in which creditors are to receive a share of the liquidation, the schedule of ranking is regarded as one of the most critical and consequential stages of the process. In preparing the schedule the administration must therefore act in accordance with the provisions on privilege in the Enforcement and Bankruptcy Act No. 2004, the special rules on secured claims and the principle of equality among creditors (par condicio creditorum).
The schedule so prepared is published to the creditors in accordance with the proper procedure. Which claims have been admitted and which rejected is shown together with the reasons. Creditors may resort to the routes of objection and complaint in order to seek judicial review as regards the rank, the amount or the legal nature of their claims.
Secured, Privileged and Ordinary Claims
In bankruptcy law claims are placed in different ranks having regard to their legal nature and their security position. This distinction is the basic criterion determining the priority with which and the extent to which creditors will receive payment at the end of the liquidation. In the liquidation claims are generally dealt with in three main groups.
Claims secured by pledge
These are claims secured by a pledge. Secured creditors are as a rule satisfied with priority and directly from the proceeds obtained from the realisation of the pledge. In this respect they occupy a privileged position compared with the other claims in the estate.
Where the value of the pledge does not cover the claim in full, the uncovered portion takes on the character of an ordinary claim and is entered in the schedule of ranking as such.
Privileged claims
These are claims that the legislature has taken under special protection for social, economic or public reasons. Maintenance claims, employees’ claims and certain public claims expressly granted a privilege by law may in particular be listed in this respect. Privileged claims are placed in the schedule after secured claims but before ordinary claims and confer a right to payment in priority to ordinary claims.
Ordinary claims
These are claims not supported by a pledge and to which no privilege is granted by law. Ordinary creditors may receive payment on a proportional (abated) basis out of the sum remaining in the estate only after secured and privileged claims have been satisfied in full.
Since this group ranks last in the liquidation, the prospect of payment depends directly on the residual value in the estate.
Objection to the Schedule of Ranking
As noted above, once the filing process has been completed the bankruptcy administration prepares a schedule of ranking in accordance with the statutory order. The schedule is the basic document forming the backbone of the liquidation, showing in what rank and in what proportion creditors are to receive payment according to their legal nature, their position as regards privilege and the amounts of their claims.
After the schedule has been drawn up, creditors may resort to the routes of objection and complaint against the schedule of ranking within the periods laid down in the Enforcement and Bankruptcy Act No. 2004. This stage is a safeguard mechanism opening the ranking and the amounts of the claims to judicial review.
The Second Meeting of Creditors
Once the processes of objection and complaint concerning the schedule of ranking have been completed, the second meeting of creditors is held. This meeting is a stage of joint decision intended to allow the creditors to assess the point the liquidation has reached and to move to the final phase.
The following matters in particular are dealt with by the creditors at the meeting:
- The schedule of ranking and the measures carried out within the scope of the liquidation are reviewed.
- The method by which the assets are to be converted into cash is settled and guiding decisions on the payment process are taken.
- It is decided whether the actions brought by or against the bankrupt are to be continued. If a decision to continue is taken, the estate is represented by the bankruptcy administration.
- The legal basis for the passage to the final phase of the liquidation is established.
After this meeting the process essentially enters the stage of completion and payment. In this respect the second meeting of creditors is regarded as a supervisory and complementary stage on the road to the conclusion of the liquidation.
The Realisation of the Assets
At the centre of the liquidation lies the conversion of the assets forming part of the estate into cash. The realisation measures are the basic activity aimed at converting the estate’s assets into cash and creating the fund on which the satisfaction of the creditors is based. These measures are carried out by the bankruptcy administration in strict adherence to the procedures and methods set out in the Enforcement and Bankruptcy Act No. 2004.
In this framework the following routes are followed by the administration:
- Movable and immovable property is sold by public auction and, in the cases provided for by law, by private treaty.
- Elements forming part of the commercial enterprise are disposed of as a whole or separately, according to which better suits the purpose of the liquidation and the benefit of the creditors.
- Intellectual and industrial property rights and claims against third parties are converted into cash by collection, assignment or, where necessary, court action.
In carrying out realisation measures the bankruptcy administration is under duties of care, loyalty and accountability. Where assets are disposed of below their true value, where the rules of sale are not observed or where an unlawful act is carried out, the legal and personal liability of the administration may arise.
Payment, Distribution and the Closure of the Bankruptcy
The Method of Distribution
Once the schedule of ranking has become final, the bankruptcy administration proceeds to the payment and distribution measures. The distribution is made on the basis of the ranking of creditors in the final schedule and in accordance with the rules on priority and proportion in the Enforcement and Bankruptcy Act No. 2004. Accordingly:
- Secured creditors are satisfied with priority and directly from the proceeds obtained from the realisation of the pledge,
- Privileged claims are satisfied according to the rank of privilege laid down by law (Art. 206),
- Ordinary creditors, by contrast, may receive payment on a proportional (abated) basis only out of the sum remaining in the estate.
In carrying out the distribution the bankruptcy administration must act in accordance with the principles of equality among creditors (par condicio creditorum) and proportionality.
The Completion of the Liquidation and the Decision of Closure
Where all the elements of the assets forming part of the estate have been realised, the claims have been collected so far as possible and, as a result of the distributions made, no further value remains in the estate to be made the subject of liquidation, the liquidation is regarded as completed.
At this stage the bankruptcy administration takes the following steps:
- It draws up the final account and report showing the realisation and distribution measures carried out,
- It brings together the documents establishing that the liquidation has been conducted in accordance with the proper procedure,
- It submits the report and accounts it has prepared to the bankruptcy office and, where necessary, to the court.
Upon a finding that the liquidation has been completed, it is ruled that the bankruptcy be closed. For the decision of closure to take effect as regards creditors and third parties it must be published in accordance with the proper procedure. With that publication the bankruptcy estate comes to an end and the duties and powers of the bankruptcy administration are removed.
Independent Legal Assessment
In a bankruptcy liquidation the moment that truly determines a creditor’s position is often not the day the bankruptcy judgment is given but the day the publication appears. The one-month filing period, the complete submission of the documents concerning the nature of the claim and the monitoring of the periods for objecting to the schedule of ranking directly determine the prospect of collection. The administrative appearance of the process does not prevent most losses of rights from arising out of simple calendar errors.
Nor is the liquidation a passive period of waiting for the management of a bankrupt company. The complete transfer of the books and records to the bankruptcy administration at the inventory stage affects the course of subsequent debates on criminal and civil liability. In a concrete file the following headings should be addressed as a priority:
- Determining before filing whether the claim is secured, privileged or ordinary in nature and preparing the supporting documents accordingly
- Diarising the date of publication and the final day of the one-month filing period
- Not overlooking the claim of title and the seven-day period for bringing an action in respect of property belonging to third parties
- Attending the first and second meetings of creditors so as to steer the decisions to be taken
- Monitoring the periods for objection and complaint after publication of the schedule of ranking
- Scrutinising decisions on urgent sale from the point of view of the interest of the estate
Independent Legal provides advisory and litigation services at every stage of a bankruptcy liquidation in matters of filing claims, disputes over title, objections to the schedule of ranking and the pursuit of the estate’s claims.